The decision to buy a home or apartment is intensely personal. Although part of the American Dream seems to include homeownership, it is not the right choice for everyone. If you are on the fence about buying or renting, here are some basic guidelines that can help you make the decision, from a financial perspective.

Cost/benefit analysis

It is worth comparing the costs and benefits of homeownership to renting. Homeownership provides potential price appreciation and tax deductions for mortgage interest and property taxes. It also requires a monthly mortgage payment, property taxes (which tend to rise every year), closing costs, renovations (unless it is a co-op), and homeowners insurance.

Renters typically pay less per month, and the savings can be invested. Aside from the monthly rent, a deposit will usually be required upfront, and many opt for rental insurance. There is also the potential for rental hikes down the road. Of course, renters have the flexibility to leave quicker than those that own the property, either at the expiration of the lease or the end of the month if there is no agreement.

What should you do?

StreetEasy has a calculator that is used to determine how long it would take to own your home before it makes financial sense. Earlier this year, the median for New York City was 4.9 years, with it at 7.4 years in Manhattan, 4.4 years in Brooklyn, and three years in Queens. There are also wide variations from the differing neighborhoods. It is a complicated calculation, with assumptions including investment rates of return and home price appreciation.

If you are not mathematically inclined and find all of that too complicated, there is a simpler approach. If you plan on being in the city for only a short period, renting is almost certainly the better option due to the flexibility and closing costs. But, if you plan on staying in the same place for several years, then it would be wise to do a back of the envelope calculation. Factors to consider include the home price, how long you plan on staying, and the interest rate on your mortgage.

As a simple example, if the purchase price is $1.5 million, and you are placing a 20% deposit, your mortgage is $1.2 million, your monthly payment (principal and interest) is about $5,400, assuming a 3.5% interest rate. If this is a co-op or condo, there are maintenance/common charges along with utilities. If these come to $2,500, your monthly cost is $7,900. This likely far outweighs a typical rent in the city. However, a portion of your monthly mortgage is applied to principal, and the interest is tax-deductible. In the early years, the payment will be primarily paying down interest.

This may bring your monthly cost down to $6,000. This is still a greater price to pay than renting, but you may choose ownership for the potential price appreciation along with the pride that comes from staking your claim.

Of course, if you can invest that $300,000 down payment at a high enough return, you will be better off with the renting option.

Final thoughts

We have only covered the decision from a financial perspective. There are emotional aspects, such as the feeling of creating your space. Repairs and perhaps replacing appliances are also costs of home ownership.

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